Square Earnings Highlight Mind-Boggling Growth
Square (NYSE: SQ) did it again. The company posted its sixth quarter in a row of accelerating revenue growth. The momentum was driven by strong double-digit growth in gross payment volume, triple-digit growth in subscription and services-based revenue, and recent acquisitions of website builder Weebly and corporate catering company Zesty. Further, Square flexed the scalability of its business model as it swung to a profit.
As investors look over Square's third-quarter results, here's an overview of the key takeaways from the quarterly update.
Square Register. Image source: Square.
Square's third-quarter results: The raw numbers
Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
Adjusted revenue | $431 million | $257 million | 68% |
Adjusted EBITDA margin | 16% | 13% | N/A |
Earnings per share | $0.04 | ($0.04) | N/A |
Data source: Square third-quarter shareholder letter. Adjusted revenue excludes transaction-based costs, bitcoin costs, and the effect of deferred revenue adjustment related to purchase accounting. EBITDA = earnings before interest, taxes, depreciation, and amortization. Table by author.
What happened with Square this quarter?
Revenue climbed 51% year over year -- an acceleration from 48% year-over-year growth in Q2.
Adjusted revenue also accelerated, rising 68% year over year compared with Q2's 60% growth.
Gross payment volume increased 29% year over year.
Net income increased from a loss of $6 million in the year-ago quarter to a profit of $20 million.
Subscription and services-based revenue was up 155% year over year, or 117% when excluding Square's acquisitions of Weebly and Zesty.
Square facilitated $405 million worth of business loans, up 34% year over year.
Hardware revenue increased 74% year over year.
What management had to say
Square's subscription and services-based revenue continued to stand out. The segment's triple-digit growth "was driven primarily by Instant Deposit, Cash Card, Caviar, and Square Capital," management said in the company's third-quarter shareholder letter.
Meanwhile, Square's 74% year-over-year increase in hardware revenue was driven by "continued growth from Square Register, Square Reader for contactless and chip, Square Stand, and third-party peripherals," management said.
Another notable trend during the quarter was Square's higher transaction-based profit as a percentage of the gross payment volume it processes. This key metric rose to 1.07%, up from 1.05% in the year-ago quarter. Key to this improvement was strong momentum in Square's e-commerce payment processing, management explained:
Transaction-based profit continued to benefit from improvements in our transaction cost profile and growth in our higher-margin products. For example, Virtual Terminal, which allows sellers to accept payments using a web browser, totaled more than $780 million in GPV in the third quarter, up nearly 120% year over year.
Looking forward
As Square has done like clockwork in previous quarters, management raised its outlook for full-year 2018 revenue and other key full-year metrics. Management said it now expects 2018 revenue between $3.26 billion and $3.27 billion, up from a previous forecast of $3.19 billion to $3.22 billion. Further, Square said it now expects adjusted revenue to rise 60% year over year, up from a previous forecast of 55% growth.
Importantly, management now has higher expectations for profitability as well. Square expects its EBITDA for the full year to be between $250 million and $255 million. Previously, management was expecting 2018 adjusted EBITDA between $240 million and $250 million.
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Daniel Sparks owns shares of Square. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.
